Latin America

Economic Snapshot for Latin America

December 9, 2014

Growth gradually gains momentum in Q3 after bottoming out in Q2

More complete data showed that growth in most Latin American economies bottomed out in the second quarter and that it is picking up slowly in the second half of the year. In the third quarter, the regional GDP estimate (excluding Venezuela which hasn’t yet published GDP figures for 2014) showed that the economy grew 0.7% year-on-year, which came in slightly above the 0.6% expansion observed in the second quarter.

Economic growth in the majority of economies is gradually picking up. However, a contraction in Brazil and deteriorating economic activity in Chile and Argentina are weighing on the regional average. In Brazil, the economy contracted in annual terms for the second consecutive quarter in Q3. GDP decreased 0.2% year-on-year, which followed the 0.9% contraction registered in Q2. Quarter-on-quarter data, however, showed that the Brazilian economy exited recession, growing a paltry 0.1% in Q3. Meanwhile, economic growth in Chile slowed from a 1.9% increase in Q2 to a lackluster 0.8% expansion in Q3, due to dampened domestic demand, particularly in investment. In Argentina, official data showed that GDP stagnated in the second quarter and more recent indicators point to a contraction in the third. After reaching a low point in Q2, regional growth is seen embarking on a gradual recovery path in 2015 in line with improving global economic activity, particularly in the United States. Meanwhile, most currencies in Latin America have weakened in the past months in step with the global strengthening of the U.S. dollar. In recent days, however, most exchange rates in the region experienced high volatility, which was exacerbated by the recent sharp fall in oil prices. 

Clouds gather on the economic horizon

The economic outlook for Latin America deteriorated again in December. This is the sixth consecutive month in which forecasters lowered the 2015 economic outlook. Analysts surveyed by LatinFocus shaved off 0.3 percentage points from last month’s forecast and now expect GDP to expand 1.9% in 2015. This month’s downward revision stemmed from lower growth forecasts in all but two of the economies surveyed. The only country for which panelists left their growth estimates unchanged was Uruguay, whereas Bolivia was the only economy for which panelists raised their projections.

Argentina and Venezuela saw sizeable cuts to their 2015 projections. Meanwhile, accumulating signs of weakness in Brazil and rising concerns that the government will not be able to rekindle growth have prompted economists to cut the country’s forecast. In Mexico, economic growth disappointed persistently throughout 2013 and 2014. Prospects of lower oil prices in 2015, along with increasing doubts about the capacity of the Mexican economy to reap the benefits of an upturn in the U.S. economy, are casting a shadow on the country’s promising economic forecasts.

That said, most countries will experience faster growth next year than in 2014—only Bolivia, Colombia, Ecuador and Uruguay are expected to record slower growth next year—whereas the recession expected this year for Argentina and Venezuela is seen continuing in 2015. Improving economic performance across the region is forecast for 2016, when output is foreseen growing 3.0%.

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BRAZIL | Economy exits technical recession but weakness looms  

The Brazilian economy expanded a meager 0.1% in the third quarter and exited the technical recession it entered in the first half of the year. However, the economy is still struggling and inflation remains high. In an effort to bolster confidence, President Dilma Rousseff appointed Joaquim Levy, an orthodox economist who has vowed to cut spending, as Finance Minister. Levy announced that he would target a 1.2% surplus in 2015, which would increase to above 2.0% in 2016 and 2017. However, Levy faces a large amount of rigidity in the budget since the vast majority of spending is attached to constitutionally mandated expenditure.

Economists are doubtful that the government will be able to quickly rekindle economic growth and have cut their projections. LatinFocus Consensus Forecast panelists expect the economy to grow 0.2% in 2014. For 2015, panelists see growth at 0.7%, which is down 0.4 percentage points from last month’s forecast. 

MEXICO | Economic activity firms up in Q3, but political and social challenges lie ahead

Mexico’s economy gained momentum in the third quarter. Agriculture recorded a strong increase and construction registered notable growth, which suggests that the sector began to recover from the slump observed in the six previous quarters. More recent data suggest that economic growth is firming up in the final quarter of the year. However, an outbreak of social unrest that has emerged in recent weeks could end up having knock-on effects on economic activity. Massive protests in reaction to the Ayotzinapa tragedy in which 43 students were kidnapped and presumably murdered have gripped Mexico City and other major cities. The government has been criticized for its inability to respond to the crisis, which represents the most severe wave of social unrest since the Peña Nieto administration took office two years ago.

The outlook for the economy remains positive, but downside risks to the growth forecast persist. LatinFocus panelists lowered Mexico’s growth forecast for 2015 from the 3.7% expected last month to 3.5%. In 2014, the panel sees economic growth at 2.3%.

ARGENTINA | Economy to contract in Q3 following stagnation in Q2

Argentina’s economy has been showing further signs of deceleration since posting flat growth in Q2. The monthly economic activity indicator contracted in August and September, while exports plummeted in October. The weak position of the Central Bank’s reserves has added to the negative economic environment. A narrowing trade surplus and the continued drop in investor confidence is putting pressure on reserves. Temporary relief has come from two installments of a currency swap agreement between the government and China. As a result, reserves rose to USD 28.9 billion at the end of November. However, the unusually large debt obligations that the government faces in 2015 will put further pressure on reserve holdings.

With presidential elections scheduled for Q4 2015 and the holdout saga unresolved, uncertainty regarding Argentina’s economic outlook persists. Negotiations between the government and holdouts will resume in January, when the so-called RUFO clause expires. However, an agreement with holdouts is not likely to come soon and macroeconomic imbalances are expected to continue next year. LatinFocus Consensus Forecast panelists see GDP dropping 1.1% in 2014. For 2015, the panel sees the economy contracting 0.7%, which is down 0.6 percentage points from last month’s forecast.

VENEZUELA | Unstable economic situation and economic policy paralysis weigh on outlook

The Venezuelan economy remains in the doldrums. The free fall of the bolivar accelerated in November due to strong purchases of U.S. dollars by Venezuelans in an attempt to shield themselves against skyrocketing inflation. Although President Nicolás Maduro announced that the government will revise the exchange rate mechanism, analysts are skeptical about the scope of the initiative and how successful it will actually be. Moreover, the sharp decline in oil prices observed in recent weeks is expected to put additional pressure on the country’s battered finances. According to some analysts, the country loses USD 700 million a year for every USD 1 decline in oil prices. In November, the government transferred about USD 4.0 billion to the Central Bank’s coffers in order to shore up the country’s shrinking reserves, which hit an 11-year low in October.

The economic climate is deteriorating sharply because of skyrocketing inflation, heterodox and interventionist policies, and falling oil prices. Against this backdrop, LatinFocus Consensus Forecast panelists shaved off 1.2 percentage points from last month’s projection and they now expect a 2.0% drop for 2015. For this year, the panel sees GDP falling 3.3%.

INFLATION | Inflation closes 2014 at highest level in nearly two decades

Inflation in Latin America is expected to close this year at 12.4% in 2014. If the current estimate is met, it will represent the highest inflation rate since 1996. Moreover, inflation expectations in Latin America continue rising, mainly due to concerns of ballooning inflation prospects for Venezuela. On average, LatinFocus panelists expect the regional average to close 2015 at 12.0%, which is up 0.7 percentage points from last month’s estimate. In 2016, inflation is seen falling to 9.7%.

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